With the A51 token launch in the rearview mirror and the v3 launch a few weeks away, it’s time to question some of the assumptions and share my vision for the future. This post will focus on the thesis behind the protocol, explain the design philosophy behind it, and question some of the assumptions.

A51 Finance (then called Unipilot), was launched as an experimental venture in 2021, soon after the launch of Uniswap v3 and its novel concentrated liquidity market-making feature. We aimed to develop a protocol allowing LPs to entrust their liquidity management to us. We implemented meticulously back-tested strategies to ensure profitability for LPs and offered several managed vaults for LPs to use. We had previously been involved in launching many DeFi protocols and being liquidity providers, we thought that this was a good opportunity for us to build something unique.

The v2 version of our protocol lost money for our users due to the huge divergence losses. The users were attracted because of the fee APR but were making losses on the principal capital. We spent the whole year trying to solve this problem starting in the mid of 2022 to the mid of 2023. There were problems around consensus too because we were managing liquidity for all the users in a vault, in hindsight it should not come as a surprise that many people did not agree with our decisions, and they left due to a combination of both reasons. The same problem is prevalent with other liquidity managers too and most of them make up for it by offering token incentives.

After talking to our users in the past few months and the experts in this space, we realized that there was a need for effective tooling in the liquidity provision space.

We identified these problems:

• Time-intensive and manual: Liquidity strategies need to be constantly monitored on AMMs and portfolios rebalanced manually.

• One size doesn't fit all: Manager protocols like Gamma Strategies and Arrakis cannot take into account the different needs and risk appetite of each LP. They make decisions based on what they think would be acceptable to most people and offer no way to control how their position should adapt to the changing market.

• Complex UX for beginners: The barrier to entry is high for new people to enter this space as no user-friendly interfaces exist.

• Vast knowledge required: A novice LP would surely lose money as they learn the risks associated with liquidity provisioning.

We went back to the drawing board and started to design a protocol that allowed LPs to have more control over their liquidity, with a superior interface to the underlying AMMs, and function like a remote control over their liquidity positions.

From the outset, we focused on building a better interface, a layer on top of the current AMMs, something that can truly take advantage of the power that concentrated liquidity provision has to offer for professional market makers, protocols looking to subsidize liquidity, and retail LPs.

Guillaume Lamber from Panoptic in his tweet elegantly captures what A51 is about.

https://twitter.com/guil_lambert/status/1752722787842613389

His observation is that the current interfaces for Uniswap v3 are not feature-rich enough for active LPs. Many products have come including our v2 which aimed to make passive LPing easier, but there exists no product that specifically caters to active LPing.

Many people incorrectly assume that A51 Finance aims to solve the DL problem for LPs, but that is not the case. DL cannot be ‘solved’, it can only be minimized.

As Atis E in his article about loss versus rebalancing (LVR) explains divergence loss is a combination of market risk and AMM-specific risk. Market risk can be hedged by using borrowed funds to provide liquidity or buying options while the AMM-specific risk comes from AMM’s trading function and cannot be minimized in the same way, and it very much depends on the design of the AMM where you are providing liquidity. An AMM like Uniswap which only gives an LP a certain percentage of the assets swapped as fees has the least protection from the DL. There are ways to minimize the AMM-specific risk like increasing the trading fees, capturing the MEV and giving to LPs, and more.

A51 Finance aims to provide tools to minimize the market-specific DL risk which relates to the market prices of an asset which I talk about below.

We aimed to design a better and more feature-rich interface for Uniswap v3. We figured out the four basic categories of customization that an LP needs:

How an LP wishes their liquidity to be spread out in different ticks. This is quite difficult to do under normal circumstances using a standard Uniswap interface.

For example, an LP could spread out their liquidity in an exponential manner in any direction that conforms to their specific strategy. They could easily concentrate all of their liquidity in one tick or a few ticks or a whole lot of other things that fit their needs.

This relates to which direction an LP expects the market to move. We have four modes: Bull, Bear, Dynamic, and Static.

Bull mode allows an LP to capture more of the upside if they anticipate an asset to move up in price and the liquidity gets rebalanced in the upward direction.

Bear mode works in the opposite direction when an LP expects the price to decline.

Dynamic mode is best for volatile markets when the price of an asset moves up and down in a short period but can lead to greater DL.

Static mode does not rebalance the position and the liquidity stays there until the LP decides to rebalance.

There are a bunch of other parameters that an LP can tweak like how much the price has to deviate from the initial price when the liquidity was provided for the rebalance to be triggered or the number of rebalances that are allowed in a specific period.

An LP position is fundamentally a gamma-negative strategy which means that it has limited upside if the prices of assets increase, but unlimited downside if the prices decrease.

Atis E talks about this in his article here.

There are many ways to hedge a position: Using the borrowed funds to add liquidity, and buying options among others.

We designed our protocol with this crucial requirement of LPs in mind where LPs would be able to hedge their position against risks.

Any good investment strategy has to have an exit plan, and the same can be said about liquidity provision. Just like you can put stop-loss orders on your investment position to protect you from losses, the same can now be done for any liquidity positions.

Exit preference parameters allow an LP to set price targets, and their liquidity gets exited as soon as that price hits.

The protocol has been designed with modularity in mind where the initial focus has been to set a robust base for the protocol before developing any future modules. The release of the protocol which is expected by the end of February includes the base contracts and market modes with the other features to follow in the coming months.

Novice/Passive LPs who wish to delegate their liquidity to an expert to manage. This could be A51 itself or anyone else.

Active LPs who wish to have more control over their liquidity behavior can now take advantage of A51’s superior interface.

Professional market makers who do market-making for tokens can use the underlying AMM as an order book DEX.

Traders who want to create automated buy/sell orders on the underlying AMM.

Projects looking to subsidize liquidity can create vaults using A51 and offer tokens as incentives.

We aim to fundamentally change the way liquidity is provided so that active LPs can harness the full potential of concentrated automated market makers, Any LP who wants to actively manage their liquidity would now have a suite of tools at their disposal, and can also create public vaults to manage liquidity for other users.

With the A51 token launch in the rearview mirror and the v3 launch a few weeks away, it’s time to question some of the assumptions and share my vision for the future. This post will focus on the thesis behind the protocol, explain the design philosophy behind it, and question some of the assumptions.

A51 Finance (then called Unipilot), was launched as an experimental venture in 2021, soon after the launch of Uniswap v3 and its novel concentrated liquidity market-making feature. We aimed to develop a protocol allowing LPs to entrust their liquidity management to us. We implemented meticulously back-tested strategies to ensure profitability for LPs and offered several managed vaults for LPs to use. We had previously been involved in launching many DeFi protocols and being liquidity providers, we thought that this was a good opportunity for us to build something unique.

The v2 version of our protocol lost money for our users due to the huge divergence losses. The users were attracted because of the fee APR but were making losses on the principal capital. We spent the whole year trying to solve this problem starting in the mid of 2022 to the mid of 2023. There were problems around consensus too because we were managing liquidity for all the users in a vault, in hindsight it should not come as a surprise that many people did not agree with our decisions, and they left due to a combination of both reasons. The same problem is prevalent with other liquidity managers too and most of them make up for it by offering token incentives.

After talking to our users in the past few months and the experts in this space, we realized that there was a need for effective tooling in the liquidity provision space.

We identified these problems:

• Time-intensive and manual: Liquidity strategies need to be constantly monitored on AMMs and portfolios rebalanced manually.

• One size doesn't fit all: Manager protocols like Gamma Strategies and Arrakis cannot take into account the different needs and risk appetite of each LP. They make decisions based on what they think would be acceptable to most people and offer no way to control how their position should adapt to the changing market.

• Complex UX for beginners: The barrier to entry is high for new people to enter this space as no user-friendly interfaces exist.

• Vast knowledge required: A novice LP would surely lose money as they learn the risks associated with liquidity provisioning.

We went back to the drawing board and started to design a protocol that allowed LPs to have more control over their liquidity, with a superior interface to the underlying AMMs, and function like a remote control over their liquidity positions.

From the outset, we focused on building a better interface, a layer on top of the current AMMs, something that can truly take advantage of the power that concentrated liquidity provision has to offer for professional market makers, protocols looking to subsidize liquidity, and retail LPs.

Guillaume Lamber from Panoptic in his tweet elegantly captures what A51 is about.

https://twitter.com/guil_lambert/status/1752722787842613389

His observation is that the current interfaces for Uniswap v3 are not feature-rich enough for active LPs. Many products have come including our v2 which aimed to make passive LPing easier, but there exists no product that specifically caters to active LPing.

Many people incorrectly assume that A51 Finance aims to solve the DL problem for LPs, but that is not the case. DL cannot be ‘solved’, it can only be minimized.

As Atis E in his article about loss versus rebalancing (LVR) explains divergence loss is a combination of market risk and AMM-specific risk. Market risk can be hedged by using borrowed funds to provide liquidity or buying options while the AMM-specific risk comes from AMM’s trading function and cannot be minimized in the same way, and it very much depends on the design of the AMM where you are providing liquidity. An AMM like Uniswap which only gives an LP a certain percentage of the assets swapped as fees has the least protection from the DL. There are ways to minimize the AMM-specific risk like increasing the trading fees, capturing the MEV and giving to LPs, and more.

A51 Finance aims to provide tools to minimize the market-specific DL risk which relates to the market prices of an asset which I talk about below.

We aimed to design a better and more feature-rich interface for Uniswap v3. We figured out the four basic categories of customization that an LP needs:

How an LP wishes their liquidity to be spread out in different ticks. This is quite difficult to do under normal circumstances using a standard Uniswap interface.

For example, an LP could spread out their liquidity in an exponential manner in any direction that conforms to their specific strategy. They could easily concentrate all of their liquidity in one tick or a few ticks or a whole lot of other things that fit their needs.

This relates to which direction an LP expects the market to move. We have four modes: Bull, Bear, Dynamic, and Static.

Bull mode allows an LP to capture more of the upside if they anticipate an asset to move up in price and the liquidity gets rebalanced in the upward direction.

Bear mode works in the opposite direction when an LP expects the price to decline.

Dynamic mode is best for volatile markets when the price of an asset moves up and down in a short period but can lead to greater DL.

Static mode does not rebalance the position and the liquidity stays there until the LP decides to rebalance.

There are a bunch of other parameters that an LP can tweak like how much the price has to deviate from the initial price when the liquidity was provided for the rebalance to be triggered or the number of rebalances that are allowed in a specific period.

An LP position is fundamentally a gamma-negative strategy which means that it has limited upside if the prices of assets increase, but unlimited downside if the prices decrease.

Atis E talks about this in his article here.

There are many ways to hedge a position: Using the borrowed funds to add liquidity, and buying options among others.

We designed our protocol with this crucial requirement of LPs in mind where LPs would be able to hedge their position against risks.

Any good investment strategy has to have an exit plan, and the same can be said about liquidity provision. Just like you can put stop-loss orders on your investment position to protect you from losses, the same can now be done for any liquidity positions.

Exit preference parameters allow an LP to set price targets, and their liquidity gets exited as soon as that price hits.

The protocol has been designed with modularity in mind where the initial focus has been to set a robust base for the protocol before developing any future modules. The release of the protocol which is expected by the end of February includes the base contracts and market modes with the other features to follow in the coming months.

Novice/Passive LPs who wish to delegate their liquidity to an expert to manage. This could be A51 itself or anyone else.

Active LPs who wish to have more control over their liquidity behavior can now take advantage of A51’s superior interface.

Professional market makers who do market-making for tokens can use the underlying AMM as an order book DEX.

Traders who want to create automated buy/sell orders on the underlying AMM.

Projects looking to subsidize liquidity can create vaults using A51 and offer tokens as incentives.

We aim to fundamentally change the way liquidity is provided so that active LPs can harness the full potential of concentrated automated market makers, Any LP who wants to actively manage their liquidity would now have a suite of tools at their disposal, and can also create public vaults to manage liquidity for other users.